Refinancing after bankruptcy. What do you need to know?Nameless Soph
When it comes to refinancing after bankruptcy, your options are usually limited by the experience of your loan officer. There seems to be a lot of misunderstanding and misinformation around refinancing a mortgage that was part of a bankruptcy.
The fact that there are so many potential scenarios makes it difficult to get answers about refinancing after a bankruptcy.
Was the mortgage canceled as a result of the bankruptcy? Are the payments up to date? Was a second mortgage a part of the bankruptcy?
This article will go through all of these cases and clear up a lot of misconceptions regarding how to refinance your mortgage after a bankruptcy.
Putting a Mortgage Into a Bankruptcy
One of the biggest myths about including a mortgage in bankruptcy is that you no longer own the house and are simply renting from the bank.
That is just false. Including a mortgage into bankruptcy only guarantees you a little financial protection in the event of mortgage default.
After the mortgage is discharged, you still own the home, and the lender cannot take it away if you keep making payments.
If you make all of your mortgage payments on the discharged mortgage and pay it off in full, you will own the house free and clear.
Only if ordered by a federal bankruptcy judge, the debts outlast the mortgage discharge, and you have the choice to continue making payments and staying in the property.
If you keep making payments on a mortgage that was included in your bankruptcy, you may be able to refinance that mortgage at a later date.
Waiting Periods for Bankruptcy
You can refinance a bankruptcy-discharged mortgage as long as you have satisfied the waiting periods for the kind of mortgage you are applying to refinance the house.
Chapter 7 or 11 Bankruptcy
- 4 years from the discharge or dismissal date you can apply for Conventional Mortgage
- 2 years from the date of release or dismissal you can apply for an FHA loan
- 2 years from the date of discharge or dismissal you can apply for a VA loan
- 3 years from the date of discharge or dismissal you can apply for a USDA loan
Chapter 13 Bankruptcy
- 2 years from the date of release or 4 years from the date of dismissal you can apply for a Conventional mortgage
- 2 years from the date of release or dismissal you can apply for an FHA loan.
- 2 years from the date of release or dismissal you can apply for a VA loan.
- 3 years from the date of release or dismissal you can apply for a USDA loan.
Exception for Conventional Extenuating Circumstances
Many stories on the internet claim that Fannie Mae modified its criteria and decreased the waiting periods following a financial difficulty.
This isn’t really correct, and all these articles are meant to attract attention to websites that gather and sell mortgage leads to mortgage companies.
They are referring to the extenuating conditions exception guideline, which says that if the bankruptcy was the consequence of a one-time incident beyond your control, and that event led directly to the hardship, a shorter waiting period may be applied.
The challenge is that these ‘rules’ are both complex and hard to document. But in the following circumstances there were successful exceptions:
- A main wage earner’s death or lifelong disability
- Employer layoff or shutdown – needs evidence from the employer confirming the cause for the layoff, as well as receipt of unemployment benefits for a minimum of 6 months.
- Employer-forced relocation.
- If divorce caused a large loss in income.
If you fall into one of these groups, your waiting period for a conventional loan might be lowered from 4 to 2 years.
Providing Proof of Your On-Time Payment History
To refinance a bankruptcy-discharged mortgage, you must prove that you have made your payments on time for at least the previous 12 months.
The mortgage is no longer included on your credit record after your bankruptcy has been dismissed. There are several stories about lenders telling people that they can’t refinance until they re-affirm the previous mortgage.
This is completely false. It is actually fairly simple to keep track of your on-time payments. A payment history from your existing lender might be requested by the lender refinancing your mortgage.
Even if the mortgage somehow doesn’t report on credit reports, your payments are still received, documented, and verifiable.
Bankruptcy and Second Mortgage
This is a unique circumstance, and your refinancing possibilities may surprise you.
If you had a second mortgage included in your bankruptcy and have continued to make payments on your first mortgage but not on the second mortgage, you can still refinance with a conventional, Fannie Mae-underwritten loan.
The essential factor here is that the refinancing must result in the removal of the second mortgage lien.
It’s simple if you do have enough equity to pay off the second mortgage in full. Then just do it.
It’s also fine if the second lien holder will accept less than the whole amount owing. All you need is a pay-off demand from the lender specifying the amount of the pay-off that they would take.
You would qualify under Fannie Mae rules as long as the second lien holder will eliminate the lien as a consequence of the refinance.
‘Lender said I couldn’t do it.’
The one thing you need to understand is that these loans are harder to get. There is also the added process of providing your bankruptcy petition, discharge, and other court documents to establish that the mortgage was included in the bankruptcy.
Add to it the fact that nearly every case is unique. Working with you is just not a wise use of their time for many loan officers and lenders.
It’s unfortunate, but it’s true.
Just because a lender says you can’t refinance does not imply you don’t qualify. It simply indicates that THEY will not lend under certain conditions.
Should you have any more questions about the topic? Don’t hesitate to give us a call.